Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2000 Commission File Number
0-11709
FIRST CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of 62-1180360
incorporation or organization) (I.R.S. Employer Identification No.)
P. O. Box 370
First Citizens Place, Dyersburg, Tennessee 38025-0370
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (901) 285-4410
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The aggregate market value of voting stock held by nonaffiliates of the
registrant at December 31, 2000 was $70,634,267.
Of the registrant's only class of common stock (no par value) there were
3,715,211 shares outstanding as of December 31, 2000 (net of Treasury Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Proxy Statement dated March 16, 2001 (Part III)
Filed by Electronic Submission
2
PART I
ITEM 1. BUSINESS
GENERAL
First Citizens Bancshares, Inc. ("Bancshares") was organized December, 1982 as a
Tennessee Corporation and commenced operations in September, 1983, with the
acquisition of all Capital Stock of First Citizens National Bank of Dyersburg
("First Citizens"). At a meeting of the Board of Directors of First Citizens
Bancshares, Inc., on April 19, 2000, a resolution was approved which authorized
the filing of a declaration with the Federal Reserve Bank which would result in
a change in status from Bank Holding Company to Financial Holding Company. In
accordance with provisions of this resolution, an application for Financial
Holding Company status was submitted to the Federal Reserve Bank of St. Louis
and subsequently approved on June 8, 2000.
As a financial holding company, Bancshares may engage in activities that are
financial in nature or incidental to a financial activity. Permissible
activities for a financial holding company are contained in Regulation Y of
Federal Reserve Regulations. Bancshares may continue to claim the benefits of
financial holding status so long as each depository institution owned by the
company remains well capitalized and well managed. In addition, Bancshares may
not commence new activities under sections 4(k) or 4(n) of the Bank Holding
Company Act or acquire control of a company engaged in activities under those
sections if any of Bancshares insured depository institutions receive a rating
of less than "satisfactory" under any examination conducted to determine
compliance with the Community Reinvestment Act.
First Citizens was chartered as a national bank in 1900 and presently operates a
general retail banking business in Dyersburg and Newbern (Dyer County), Ripley
(Lauderdale County), and Troy and Union City (Obion County), Tennessee,
providing customary banking services. First Citizens operates under the
supervision of the Comptroller of the Currency, is insured up to applicable
limits by the Federal Deposit Insurance Corporation and is a member of the
Federal Reserve System. First Citizens operates under the day-to-day management
of its own officers and directors; and formulates its own policies with respect
to lending practices, interest rates, service charges and other banking matters.
Bancshares' primary source of income is dividends received from First Citizens.
Dividend payments are determined in relation to First Citizens' earnings,
deposit growth and capital position in compliance with regulatory guidelines.
Management anticipates that future increases in the capital of First Citizens
will be accomplished through earnings retention or capital injection.
The following table sets forth a comparative analysis of Assets, Deposits, Net
Loans, and Equity Capital of Bancshares as of December 31, for the years
indicated:
December 31
(in thousands)
2000 1999 1998
Total Assets $500,954 $472,670 $472,153
Total Deposits 371,854 366,819 360,699
Total Net Loans 337,196 321,659 303,459
Total Equity Capital 46,889 43,680 43,082
Individual bank performance is compared to industry standards through
utilization of the Uniform Bank Performance Report (UBPR), published quarterly
by the Federal Financial Institution's Examination Council.
3
This report provides comparisons of significant operating ratios of First
Citizens Bancshares with peer group banks. Presented in the following chart are
comparisons of First Citizens with peer group banks for the periods indicated:
*12/31/00 12/31/99 12/31/98
BANCSHARES PEER GRP BANCSHARES PEER GRP BANCSHARES PEER GRP
Average Assets/
Net Interest
Income 3.98% 4.13% 4.17% 4.14% 4.05% 4.20%
Average Assets/
Net Operating
Income .98% 1.11% 1.23% 1.08% 1.05% 1.16%
Net loan losses/
Average total
loans .40% .15% .28% .17% .23% .22%
Primary Capital/
Average Assets 9.29% 8.64% 9.24% 8.58% 9.32% 9.23%
Cash Dividends/
Net Income ** 71.64% 22.66% 58.35% 24.39% 57.51% 26.22%
*Performance as of 12/31/00 is compared to peer group ratios as of
09/30/00
(Most recent Federal Reserve Report)
EXPANSION
On November 12, 1999 the Gramm-Leach-Bliley Act was signed into law. The act
contains seven titles, each of which focuses on a different aspect of the
financial services industry. This new law will significantly change the way we
do business and still pave the way for a new era in banking.
Based on authority granted under this act, First Citizens Bancshares, Inc.,
formerly a Bank Holding Company, converted to a Financial Holding Company. As a
financial holding company, Bancshares may engage in activities that are
financial in nature or incidental to a financial activity.
First Citizens through its strategic planning process has stated its
intention to seek profitable opportunities that would utilize excess capital and
maximize income within the West Tennessee Area. First Citizens' objective in
acquiring other banking institutions would be for asset growth and
diversification into other market areas. Acquisitions would afford the bank
increased economies of scale within the data processing function and better
utilization of human resources. Any acquisition approved by Bancshares, would be
deemed to be in the best interest of Bancshares and its shareholders.
4
SUPERVISION AND REGULATION
Bancshares is a one-bank financial holding company under the Bank Holding
Company Act of 1956, as amended, and is subject to supervision and examination
by the Board of Governors of the Federal Reserve.
As a bank holding company, Bancshares is required to file with the Federal
Reserve annual reports and other information regarding the business
obligations of itself and its subsidiaries. Board approval must be obtained
before Bancshares may:
(1) Acquire ownership or control of any voting securities of a bank or
Bank Holding Company where the acquisition results in the BHC owning or
controlling more than 5 percent of a class of voting securities of that bank
or BHC;
(2) Acquire substantially all assets of a bank or BHC or merge with
another BHC.
Federal Reserve approval is not required for a bank subsidiary of a BHC to
merge with or acquire substantially all assets of another bank if prior
approval of a federal supervisory agency, such as the Comptroller of the
Currency is required under the Bank Merger Act. Relocation of a subsidiary
bank of a BHC from one state to another requires prior approval of the Federal
Reserve and is subject to the prohibitions of the Douglas Amendment.
The Bank Holding Company Act provides that the Federal Reserve shall not
approve any acquisition, merger or consolidation which would result in a
monopoly or which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States. Further, the Federal Reserve may not approve any other proposed
acquisition, merger, or consolidation, the effect of which might be to
substantially lessen competition or tend to create a monopoly in any section
of the country, or which in any manner would be in restraint of trade, unless
the anti-competitive effect of the proposed transaction is clearly outweighed
in favor of public interest by the probable effect of the transaction in
meeting convenience and needs of the community to be served. An amendment
effective February 4, 1993 further provides that an application may be denied
if the applicant has failed to provide the Federal Reserve with adequate
assurances that it will make available such information on its operations and
activities, and the operations and activities of any affiliate, deemed
appropriate to determine and enforce compliance with the Bank Holding Company
Act and any other applicable federal banking statutes and regulations. In
addition, consideration is given to the competence, experience and integrity
of the officers, directors and principal shareholders of the applicant and any
subsidiaries as well as the banks and bank holding companies concerned. The
Federal Reserve also considers the record of the applicant and its affiliates
in fulfilling commitments to conditions imposed by the Federal Reserve in
connection with prior applications.
A bank holding company is prohibited with limited exceptions from engaging
directly or indirectly through its subsidiaries in activities unrelated to
banking or managing or controlling banks. One exception to this limitation
permits ownership of a company engaged solely in furnishing services to banks;
another permits ownership of shares of the company, all of the activities of
which the Federal Reserve has determined after due notice and opportunity for
hearing, to be so closely related to banking or managing or controlling banks,
as to be a proper incident thereto. Moreover, under the 1970 amendments to the
Act and to
5
the Board's regulations, a financial holding company and its subsidiaries are
prohibited from engaging in certain "tie-in" arrangements in connection with any
extension of credit or provision of any property or service. Subsidiary banks of
a bank holding company are subject to certain restrictions imposed by the
Federal Reserve Act on any extension of credit to the financial holding company
or to any of its other subsidiaries, or investments in the stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower.
Financial holding companies are required to file an annual report of their
operations with the Federal Reserve, and they and their subsidiaries are subject
to examination by the Federal Reserve.
Bancshares is subject to capital adequacy requirements imposed by the Federal
Reserve Bank. In addition, First Citizens (the principal subsidiary of the
corporation) is restricted by the Office of the Comptroller of the Currency
(Comptroller)from paying dividends in any years which exceed the net earnings of
the current year plus retained profits of the preceding two years. It is the
policy of First Citizens to comply with regulatory requirements for the payment
of dividends. The Federal Reserve adopted a risk-based capital measure for use
in evaluating the capital adequacy of bank holding companies effective January
1, 1991. The risk-based capital measure focuses primarily on broad categories of
credit risk and incorporates elements of transfer, interest rate and market rate
risk. The calculation of risk-based capital is accomplished by dividing
qualifying capital by weighted risk assets. The minimum risk-based capital ratio
is 8%, at least one-half or 4.00% must consist of core capital (Tier 1), and the
remaining 4% may be in the form of core (Tier 1) or supplemental capital (Tier
2). Tier 1 capital/core capital consists of common stockholders equity,
qualified perpetual stock and minority interests in consolidated subsidiaries.
Tier 2 capital/supplementary capital consists of the allowance for loan and
lease loses, perpetual preferred stock, term subordinated debt, and other debt
and stock instruments. Bancshares has historically maintained capital in excess
of minimum levels established by the Federal Reserve. A risked based capital
analysis is performed on a quarterly basis to test for compliance with Federal
Reserve and bank policy guidelines before declaring a dividend or increasing a
dividend. First Citizens' policy states that before declaring a dividend the
following ratios will be achieved: (1) Risk Based Capital Tier 1 will be 8.25%
or above; Return on year-to-date average equity 9.00%; Asset growth and
projected one year future asset growth less than 20.00%; and non performing
assets to capital less than 30%. Non performing assets include 90 day past due
and non accrual loans.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information relates to the principal executive officers of
Bancshares and its principal subsidiary, First Citizens National Bank as
of December 31, 2000
Name Age Position and Office
Stallings Lipford 70 Chairman of the Board of Bancshares
and First Citizens. Mr. Lipford
joined First Citizens in 1950. He
became a member of the Board of
Directors in 1960 and President in
1970. He was made Vice Chairman of
the Board in 1982. He served as
Vice Chairman of the Board of
Bancshares from September, 1982 to
February, 1984. The Board elected
Mr. Lipford Chairman of both First
Citizens and Bancshares on February
14, 1984. He served as President of
First Citizens and Bancshares from
1983 to 1992, and as CEO of
Bancshares and First Citizens from
1992 until 1996.
6
Katie Winchester 60 Vice Chairman of the Board since Fall
2000. President and CEO of Bancshares
and First Citizens; employed by First
Citizens in 1961; served as Executive
Vice President and Secretary of the
Board from 1986 to 1992. She was
appointed CEO of Bancshares and
First Citizens in 1996; and President
of Bancshares and First Citizens in
1992. Ms. Winchester was elected to
the Board of both First Citizens and
Bancshares in 1990.
Ralph Henson 59 Vice President of Bancshares;
Executive Vice President of Loan
Administration of First Citizens.
Employed by First Citizens in 1964.
Mr. Henson served First Citizens as
Senior Vice President and Senior
Lending Officer until his appointment
as Executive Vice President of Loan
Administration in February, 1993.
Jeffrey Agee 40 Vice President and Chief Financial
Officer of Bancshares. Appointed
Executive Vice President and CFO of
First Citizens National Bank in
August 1999. Mr. Agee served as
Senior Vice President and CFO of
First Citizens prior to this
appointment. Employed by First
Citizens in 1982. Served First
Citizens previous to April, 1994 as
Vice President and Accounting Officer.
Appointed Senior Vice President and
Chief Financial Officer of First
Citizens, April 17, 1996.
Barry Ladd 60 Appointed Executive Vice President
and Chief Administrative Officer of
First Citizens and Bancshares in
1996. Senior Vice President and
Senior Lending Officer of First
Citizens from April 20, 1994 to
January 17, 1996. Employed by First
Citizens in 1972. Mr. Ladd served
First Citizens as Vice President and
Lending Officer previous to his
appointment as Senior Vice President.
Judy Long 46 Vice President and Secretary to
the Board of First Citizens
Bancshares. Appointed Executive Vice
President and Chief Operations
Officer and Secretary to First
Citizens National Bank in August 1999.
Ms. Long served as Senior Vice
President and Chief Operations
Officer and Secretary to First
Citizens prior to this appointment.
She served as Senior Vice President
and Administrative Officer previous
to November 1997; Vice President and
Loan Operations Manager (1992-1996).
Employed by First Citizens on July
19, 1974.
BANKING BUSINESS
First Citizens operates a general retail banking business in Dyer County,
Tennessee. The bank expanded its banking operations into Lauderdale County in
1995 with the purchase of $8 million in assets and Obion County in 1997 and
1998, purchasing approximately $104 million in assets. All persons who live in
either community or who work in or have a business or economic interest in
either county are considered as forming a part of the area serviced by First
Citizens. First Citizens provides customary banking services, such as checking
and savings accounts, funds transfers, various types of time deposits, and safe
deposit facilities. It also finances commercial transactions and makes and
services both secured and unsecured loans to individuals, firms, and
corporations. Commercial lending operations include various types of credit
services for its customers.
7
Agricultural services are provided that include operating loans as well as
financing for the purchase of equipment and farm land. The consumer lending
department makes direct loans to individuals for personal, automobile, real
estate, home improvement, business and collateral needs. Mortgage lending makes
available long term fixed and variable rate loans to finance the purchase of
residential real estate.
These loans are sold in the secondary market without retaining servicing rights.
Credit cards and open-ended credit lines are available to both commercial
customers and consumers.
Corporate Offices for First Citizens Bancshares and First Citizens National Bank
are located in Dyersburg/Dyer County, Tennessee. Dyersburg/Dyer County is
located in northwest Tennessee and sits on the banks of the Mississippi River.
It is 78 miles northeast of Memphis, Tennessee, 165 miles west of Nashville and
230 miles south of St. Louis, Missouri. Dyer County is equidistant between
Chicago and New Orleans with direct rail, Amtrak, highway and interstate service
to major industrial and consumer markets. Dyersburg/Dyer County is an anchor in
the region that blends education, transportation, industry agribusiness and
retail trade to serve the tristate and service the encompassing Northwest
Tennessee, Northwest Arkansas, and the Missouri Bootheel area. Dyer County is a
mix of agriculture and industry. Sixty-eight percent of the land in Dyer County
is in agricultural production and farming is a major industry in the county.
Dyer County is Tennessee's number one producer of soybeans, grain sorghum,
commercial vegetables and rice. Other important crops are wheat, cotton, and
corn. The county's 526 farm operations average 445 acres. Agriculture loans
outstanding on the books of First Citizens National Bank totaled $25,780,721 or
7.6 percent of total loans. Agriculture loans totaling $12,482,029 are well
secured with real estate, including farmland, residential property, and other
improvements, while $10,007,711 are secured loans to finance crop production and
the purchase of equipment. Approximately $3.3 million in agriculture loans are
90% guaranteed by Farm Services Administration (a government agency). There are
61 manufacturers and processors distributed throughout the county employing
approximately 7,500 people. The local economy appears to be slowing, following
the trend which began nationally in mid - 2000. In December 2000, Dyer County
unemployment rate was 6.1% compared to the State of Tennessee unemployment rate
of 3.8%. The labor force in Dyer County decreased 7.66% from 19,450 in January
1995 to 17,960 in December 2000 primarily due to closings and layoffs in local
industries and businesses.
First Citizens National Bank expanded its base of operations into Obion County
in 1998. Obion County is located approximately 27 miles north of Dyersburg and
is adjacent to Dyer County. Economic conditions in Obion County appear to be
solid and growing. The unemployment rate as of December 31, 2000 was 3.5% down
from 4.1% at December 31, 1999. The County is a mix of industry, service and
retail business. Goodyear Manufacturing, a builder of tires, is the largest
employer in the county, employing approximately 3,400 workers at year end 2000.
Total Assets of First Citizens National Bank - Obion County offices in Troy and
Union City are approximately $96 million consisting primarily of consumer and
retail business loans. Total assets of the Lauderdale County office in Ripley
have increased to approximately $16.5 million consisting primarily of
commercial, business and agriculture loans. Unemployment in Lauderdale County as
of December 31, 2000 was 6.1% compared to 3.8% for the state.
First Citizens Financial Plus, Inc., a Bank Service Corporation wholly owned by
First Citizens is a licensed Brokerage Service. This allows the bank to compete
on a limited basis with numerous non-bank entities who pose a continuing threat
to our customer base, and are free to operate outside regulatory control. A
second office of First Citizens Financial Plus, Inc. was opened in January 2000
at our Union City location. Net income produced by this subsidiary during 2000
was $126,000.
8
First Citizens was granted trust powers in 1925 and has maintained an active
Trust Department since that time. Assets as of December 31, 2000 were in excess
of $141,755,000. Services offered by the Investment Management and Trust
Services Division include but are not limited to estate settlement, trustee of
living trusts, testamentary trustee, court appointed conservator and guardian,
agent for investment accounts, and trustee of pension and profit sharing trusts.
Delta Finance, a finance company wholly owned by First Citizens National Bank
offers financial service to the retail market. Services offered by Delta
Finance, consumer finance affiliate, consist primarily of consumer and
residential real estate loans. The three offices of Delta Finance are located in
Dyersburg, Milan and Union City, TN. The Union City location was purchased in
November 2000.
On February 9, 1998, White and Associates/First Citizens Insurance, LLC was
chartered by the State of Tennessee. The principal office of White and
Associates/First Citizens, originally located at 104 North Monroe Street,
Newbern, Tennessee, has relocated to the Main Office of First Citizens in
Dyersburg, with one full-time agent remaining at the Newbern location. White and
Associates/First Citizens is a general insurance agency offering a full line of
insurance products including casualty, Life and Health, and crop insurance.
A second location of White and Associates/First Citizens Insurance was opened on
July 1, 1998 with the purchase of Durham Insurance and is now operating out of
the Union City Main Office of First Citizens National Bank. On December 28, 1998
a credit insurance company was formed and will be known as First Citizens/White
and Associates Insurance Company. In January 1999, First Citizens merged with
First Volunteer Bank of Union City and the primary office for Obion County was
relocated to the Union City Branch. Halls Insurance Agency, a primary provider
of Crop Insurance in the state of Tennessee, was acquired by White &
Associates/First Citizens Insurance LLC and a full time agent placed in the
Agricultural Department at the Main Bank. Another full time insurance agent was
located in the Ripley Office. In addition, a Title Insurance Company established
in 1999, is two-thirds owned by White and Associates/First Citizens, LLC.
On July 19, 2000, the Board approved the organization of Nevada I, which is a
corporation organized and existing under the laws of the state of Nevada. The
sole activities of Nevada I are the ownership of stock in Nevada II and the
ownership of certain loans pursuant to a Participation Agreement. Nevada I will
neither own nor lease any tangible property. Nevada I will have an employee
located in the state of Nevada and officers and directors located in the state
of Tennessee. Permission was also granted to organize Nevada II, which is also a
corporation organized and existing under the laws of the state of Nevada. Nevada
II board of directors consists of three persons, two Tennessee residents and one
Nevada resident. All board meetings will held in Las Vegas, Nevada. The
principal activity of Nevada II is to acquire and sell investment securities as
well as collect the income from the portfolio. The sole purpose will be to
transfer the bank's investment activity to the Nevada II Corporation. First
Citizens National Bank income is projected to increase in excess of $300,000 the
first year of operation. In conjunction with the Nevada Corporation and transfer
of the investment portfolio, First Tennessee will assume management of the
portfolio.
The business of providing financial services is highly competitive. The
competition involves not only other banks but non-financial enterprises as well.
In addition to competing with other commercial banks in the service area, First
Citizens competes with savings and loan associations, insurance companies,
savings banks, small loan companies, finance companies, mortgage companies, real
estate investment trusts, certain governmental agencies, credit card
organizations, and other enterprises.
The following tabular analysis sets forth the competitive position of First
Citizens when compared with other financial institutions in the service area for
the period ending June 30, 2000.
9
Dyer, Lauderdale & Obion Counties Market
(Bank's Only)
(in thousands)
Total Deposits % of Market Share
Bank Name 06/30/00 06/30/00
First Citizens
National Bank $ 365,510 28.57%
First State Bank 216,651 16.93%
Union Planters Bank,
National Association 122,064 9.54%
Bank of Ripley 107,440 8.40%
Commercial Bank & Trust Co. 86,437 6.76%
Security Bank 81,656 6.38%
First Tennessee Bank,
National Association 77,032 6.02%
Reelfoot Bank 66,962 5.23%
Bank of Halls 39,287 3.07%
Lauderdale County Bank 31,614 2.47%
Gates Banking & Trust Co. 24,876 1.94%
Bank Tennessee 22,523 1.76%
BancorpSouth Bank 15,200 1.19%
Farmers Bank,
Woodland Mills, TN 12,696 0.99%
City State Bank 9,435 0.74%
Total $1,279,383 100.00%
*Does not include deposits of $15,674,000 categorized as Overnight and fixed
term Repurchase Agreements.
At December 31, 2000 Bancshares and its subsidiary, First Citizens, employed a
total of 209 full time equivalent employees. Having been a part of the local
community in excess of 100 years, First Citizens has been privileged to enjoy a
major share of the financial services market. Dyersburg and Dyer County are
growing and with this growth come demands for more sophisticated financial
products and services. Strategic planning has afforded the Company both the
physical resources and data processing technology necessary to meet the
financial needs generated by this growth.
USURY, RECENT LEGISLATION AND ECONOMIC ENVIRONMENT
Tennessee usury laws limit the rate of interest that may be charged by banks.
Certain Federal laws provide for preemption of state usury laws. Legislation
enacted in 1983 amends Tennessee usury laws to permit interest at an annual rate
of interest four (4) percentage points above the average prime loan rate for the
most recent week for which such an average rate has been published by the Board
of Governors of the Federal Reserve, or twenty-four percent (24%), which ever is
less (TCA 47-14-102(3)). The "Most Favored Lender Doctrine" permits national
banks to charge the highest rate permitted by any state lender.
10
Specific usury laws may apply to certain categories of loans, such as the
limitation placed on interest rates on single pay loans of $1,000.00 or less for
one year or less. Rates charged on installment loans, including credit cards, as
well as other types of loans may be governed by the Industrial Loan and Thrift
Companies Act.
On September 29, 1994, President Clinton signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Act"). The Act
provides for nationwide interstate banking and branching with certain
limitations. The Act permits bank holding companies to acquire banks without
regard to state boundaries after September 29, 1995. The Federal Reserve may
approve an interstate acquisition only if, as a result of the acquisition, the
bank holding company would control less than 10% of the total amount of insured
deposits in the United States or 30% of deposits in the home state of the bank
being acquired. The home state can waive the 30% limit as long as there is no
discrimination against out-of-state institutions.
Pursuant to the Act, interstate branching took effect on June 1, 1997, except
under certain circumstances. Once a bank has established branches in a host
state (a state other than its headquarters state) through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the host state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable federal
or state law.
The Act further provides that individual states might opt out of interstate
branching, prior to May 31, 1997. A bank in that state may merge with a bank in
another state provided that neither of the states have opted out.
The Federal Reserve in September, 1996 gave bank holding companies the right to
exclude certain securities earnings from the 10% cap on underwriting revenue
through "Section 20 Units". It later removed three firewalls, one of which
prevented the same bank employee from selling underwriting services, loans and
transactions accounts. The Federal Reserve on December 20 more than doubled, to
25% the amount of revenue section 20 units may earn underwriting and dealing in
commercial securities. The Office of the Comptroller of the Currency in adopting
its controversial operating-subsidiary rule in November 1996, established a
procedure that allows national banks to create subsidiaries to underwrite
securities, sell insurance, or conduct other activities that the banks may
engage in directly. Change in the law for securities underwriting will have no
impact on First Citizens since the bank does not engage in this practice.
Legislation being considered would possibly limit this action to operating
Subsidiaries of the Holding Company only.
The Comptrollers's operating-subsidiary rule also streamlined national banks'
applications for new branches. It sets a strict 45-day deadline for Comptroller
action on all applications, with a 10 day extension possible when serious CRA
issues are raised. The Comptroller provisions closely parallel changes to
Regulation Y issued by the Federal Reserve in August, 1996. Those changes give
the Federal Reserve 15 days to process most merger applications. It also expands
data processing powers, eliminates tying restriction on nonbanks, and allows
bank-run trusts to buy mutual funds advised by the bank.
The Gramm-Leach-Bliley Act, referred to as "Financial Modernization" was signed
into law November 12, 1999. The Act is the most significant piece of legislation
to be enacted in the last 50 years and is expected to dramatically change the
landscape of the financial services industry. In essence, the Act is a
conglomeration of numerous provisions that impact a broad range of issues within
the banking industry. Financial Modernization will pave the way for a new era in
banking.
11
The Act contains seven titles, each of which focuses on a different aspect of
the financial services industry. An overview of the Act can be summarized using
the following points:
o Removes barriers between insurance, banks, and securities by allowing
these entities to merge and sell each other's products under a holding
company structure with some exceptions.
o Reasserts the supremacy of state regulation of the business of insurance
with specific exceptions.
o Prohibits companies outside the financial services industry to purchase
(merge/affiliate) with insurers, banks, and/or securities firms.
o Allows banks to sell insurance and securities products as long as it
discloses to the purchasers that these products are not guaranteed by the
Federal Deposit Insurance System.
o Prohibits banks from tying the purchase of insurance and securities
products as conditions for loan approvals.
o Permits affiliated companies to share customers' personal data with each
other but gives the customer the right to prohibit the sharing of this
data with companies outside the holding company structure.
o Allows states to preempt federal laws that offer greater privacy
protections than those included in the Financial Services Modernization
Act.
o Requires states to enact uniform laws and regulations governing the
licensure of individuals and entities authorized to sell and solicit the
purchases of insurance within and outside a state.
What does this mean for First Citizens? The primary impact will be increased
competition as large-scale independent investment bankers (brokerage firms,
insurance companies, mutual funds) are likely to begin offering banking services
in offices nationwide. The good news is, our focus on diversification has placed
the Company in a position to compete by offering the same products and services
at convenient locations by a staff our customers know and trust. Through
utilization of technology, we offer the same sophisticated services as larger
banks with offices nationwide. One example is our Internet Banking Account that
has drawn rave reviews from existing and new customers. Customers of First
Citizens Financial Plus have access to on-line trading and White and
Associates/First Citizens Insurance has established a web presence that is
progressing toward on-line insurance sales.
Overall, opportunities available as a result of the new legislation are a plus
for community banks. Increased competition that is sure to develop from giant
financial services organizations simply means we will work harder to earn the
business of our customers. As community bankers, we recognize that bigger does
not always mean better, and knowing our customers affords us a tremendous
advantage as we strive to identify and serve their financial needs.
First Citizens intends to pursue challenges and opportunities presented by
"Financial Modernization". We have made the choice to compete and will do so in
an aggressive manner. We intend to maximize our potential for success as we
focus on the following:
o Market Awareness - Business decisions will be driven by a clear
understanding of the financial needs of existing and potential customers,
a focus on enhancing our ability to serve those needs and an awareness of
changes which might impact either or both.
o Strategic Planning - Establishing a clear direction for the future of
First Citizens, understanding what must be done to accomplish established
goals and recognizing signs that might indicate a need to rethink the
strategy are key components of the Plan. The management team, acting under
guidance of a diverse and committed Board of Directors is positioned to
execute a well thought out Strategic Plan.
12
o Technology Utilization - Automated customer information systems,
electronic banking and remote distribution of services are as
available to First Citizens as to the largest bank in America. We are
committed to investing resources in a manner that will allow us to
remain competitive as the information age continues to grow and
mature.
o Staff Development - There is no one element within an organization
more important to success than is the quality of staff. In spite of
automation and the efficiencies of outsourcing, community banks still
need people. In response, a formalized Staff Development program was
introduced in 1999, which will support and enhance the quality of
current and future management of First Citizens at all levels.
Recognizing leadership skills, enhancing abilities through training
and supporting realistic career goals are primary objectives of this
ongoing process.
The likely focus of the immediate future in this industry is the convergence of
financial services. Our emphasis on diversification in recent years has placed
First Citizens in the enviable position of being able to effectively compete in
this new environment.
The Board of Governors of the Federal Reserve System published guidelines for
Customer Information Security and Customer Financial Privacy with a mandatory
effective date of July 1, 2001. First Citizens has established policies in
adherence to the published guidelines. These policies will be submitted for
board approval on March 21, 2001 and will become effective April 1, 2001.
The three principal requirements relating to the Privacy of Consumer Financial
Information in the GLBA:
o Financial institutions must provide their customers with notices
describing their privacy policies and practices, including their policies
with respect to the disclosure of nonpublic personal information to their
affiliates and to nonaffiliated third parties. The notices must be provided
at the time the customer relationship is established and annually
thereafter.
o Subject to specified exceptions, financial institutions may not disclose
nonpublic personal information about consumers to any nonaffiliated third
party unless consumers are given a reasonable opportunity to direct that
such information not be shared (to "opt out").
o Financial institutions generally may not disclose customer account numbers
to any nonaffiliated third party for marketing purposes.
The Customer Information Security guidelines implement section 501(b) of the
Gramm-Leach-Bliley Act. The act requires the agencies to establish standards for
financial institutions relating to administrative, technical and physical
safeguards for customer records and information.
The guidelines require financial institutions to establish an information
security program to:
o Identify and assess the risks that may threaten customer information;
o Develop a written plan containing policies and procedures to manage and
control these risks;
o Implement and test the plan; and
o Adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal or
external threats to information security
13
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
There are no known trends, events or uncertainties that are likely to have a
material effect on First Citizens liquidity, capital resources or results of
operation. There currently exists no recommendation by regulatory authorities
which if implemented, would have such an effect. There are no matters which have
not been disclosed. Bancshares and First Citizens are located in a highly
competitive market. There are numerous banks located within markets served by
First Citizens who compete for deposit dollars and earning assets, two of whom
are branches of large regional competitors. First Tennessee Bank and Union
Planters National Bank are two of the largest financial institutions in the
state. Interstate banking as permitted by recent federal legislation as
discussed herein could possibly bring about the location of large out of state
banks to the area. If so, First Citizens would continue to operate as it has in
the past, focusing on the wants and needs of existing and potential customers
and maximizing the use of technology. The quality of service and individual
attention afforded by an independent community bank cannot be matched by large
regional competitors, managed by a corporate team unfamiliar to the area. First
Citizens is a forward thinking bank offering products and services required to
maintain satisfactory customer relationships as we move into the twenty-first
century.
Monetary policies of regulatory authorities, including the Federal Reserve have
a significant effect on operating results of bank holding companies and their
subsidiary banks. The Federal Reserve regulates the national supply of bank
credit by open market operations in United States Government securities, changes
in the discount rate on bank borrowings, and changes in reserve requirements
against bank deposits. A tool once extensively used by the Federal Reserve to
control growth and distribution of bank loans, investments and deposits has been
eliminated through deregulation. Competition, not regulation, dictates rates
which must be paid and/or charged in order to attract and retain customers.
Federal Reserve monetary policies have materially affected the operating results
of commercial banks in the past and are expected to do so in the future. The
nature of future monetary policies and the effect of such policies on the
business and earnings of the company and its subsidiaries cannot be accurately
predicted.
ITEM 2. PROPERTIES
First Citizens owns and occupies a six-story building in Dyersburg, Tennessee
containing approximately 50,453 square feet of office space, bearing the
municipal address of First Citizens Place (formerly 200 West Court). An
expansion program completed during 1988 doubled the available floor space of the
existing facility. The space was utilized to combine all lending and loan
related functions. First Citizens owns the Banking Annex containing total square
footage of 12,989 which provides operating space for banking departments i.e.
agricultural services, training and public relations, as well as the bank's
Brokerage subsidiaries. The municipal address of the bank occupied portion of
the Annex is 215-219 Masonic Street.
The land and building occupied by the Downtown Drive-In Branch located at 113
South Church Street, Dyersburg, Tennessee is owned by First Citizens. The
building, containing approximately 1,250 square feet, is located on a lot which
measures 120 feet square. Also located at this address is a separate ATM
facility wholly owned by the Bank. Construction of a new Downtown Drive-In
facility on the existing site will begin early in the second quarter of 2000
with a projected completion date of early fourth quarter. The new facility will
be approximately 898 square feet and will be a remote motor bank with six
drive-thru lanes and a drive-up ATM lane. The current lobby traffic will be
redirected to the Main Bank Office downtown. Drive-thru service for customers is
expected to continue without interruption during the construction.
14
The Green Village Office is located at 620 U.S. 51 Bypass adjacent to the Green
Village Shopping Center. Construction of the new office was completed in June
2000. The 6400 square foot facility is designed to generate and service a much
larger customer base than currently exists. The addition of a commercial lender
to staff, a small business center designed to focus on the needs of local
business and a full service postal facility lay the groundwork for growth and
development at this location. This facility is equipped with seven drive up
teller lanes, one of which is an ATM.
During June, the Super Money Market Branch located inside the Kroger Supermarket
on Highway 78 was closed. Significant effort was expended to redirect customers
to other branches, with focus being on our new Green Village Office. The Super
Money Market office has for a number of years evolved to be a paying and
receiving station. Net losses continued to increase and, at the same time,
monthly costs on a lease negotiated with NBC in 1986 increased with each renewal
at five-year intervals. This rate was more than twice the rate for comparable
space in the Dyersburg area.
The Newbern Branch, also owned by First Citizens, is located on North Monroe
Street, Newbern, Tennessee. The building contains approximately 4,284 square
feet and occupies land which measures approximately 1.5 acres. A separate
facility located in Newbern on the corner of Highway 51 and RoEllen Road houses
an ATM. Both land and building are owned by the Bank.
The Industrial Park Branch located at 2211 St. John Avenue is a full service
banking facility that offers drive-thru Teller and ATM services. The building
owned by First Citizens National Bank contains approximately 2,773 square feet
and is located on 1.12 acres of land. The Industrial Park Branch, became
operational In November, 1994.
Construction of the new branch office in Lauderdale County was completed during
the second quarter of 1999. The building contains approximately 3,500 square
feet and was built on 1.151 acres of land located at 316 Cleveland Street in
Ripley, providing a larger, more efficient facility to better serve our
customers in Lauderdale County. The Ripley Office offers full serving banking
with drive up teller lanes, twenty-four hour drive up ATM as well as Mortgage,
Trust, Brokerage and Insurance services. Customers and staff celebrated a move
to the new location on July 1, 1999. First Citizens continued to retain title to
the original building. This property was held in bank premises until sold during
fourth quarter of 2000.
The Bank of Troy was purchased by First Citizens National Bank in early 1998.
The Troy Branch is located on Harper Street just west of Highway 51 in Troy,
Tennessee. The building is two story brick and siding. The site consists of
three lots with maximum dimensions on each side being 272 feet and 260 feet. The
first floor in the main building contains 5,896 square feet and houses a full
service branch facility. Most of the building was constructed in 1970 with
additions and renovations being made since that time. The Troy Branch also
offered limited drive-through services at a location on Highway 51 which was
closed May 1, 1999. Permission to close this location was granted by the OCC
based on the limited volume of business conducted by customers compared to the
cost of operations. First Citizens has two ATMs located in Troy, one at 510 East
Harper Street and the other in the Little General Store.
15
First Volunteer Bank in Union City was purchased by First Citizens early in
January 1999. The Union City branch operates two full service facilities, a
motor branch and one ATM in Obion County. The main office is located at 100
Washington Avenue in Union City. The brick building consists of 52,500 square
feet on three floors and is a combination of two buildings. The bank occupies
10,000 square feet of the ground floor. An additional 3,750 square feet are used
for storage space. The other 3,750 square feet of the ground floor are leased to
Snappy Tomato Pizza Company. A motor branch is located at First and Harrison
Streets across from the main office. The East branch facility and ATM are
located at 1509 East Reelfoot Avenue in Union City. The ATM located in the
Goodyear Manufacturing facility in Union City was relocated to the Little
General Store in Troy on September 7, 2000.
As a result of the Union City acquisition, First Citizens acquired a 5,123
square foot building having a street address of 500 South First Street,
currently leased by Radio Shack. This building will be considered in terms of
future expansion of the Union City franchise, or will be sold if no future
utilization can be identified.
There are no liens or encumbrances against any properties owned by First
Citizens.
ITEM 3. LEGAL PROCEEDINGS
First Citizens is involved in routine legal issues. However, the outcome of
these issues are not expected to have a material adverse effect to the bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ending December 31, 2000, there were no
meetings, annual or special, of the shareholders of Bancshares. No matters were
submitted to a vote of the shareholders nor were proxies solicited by management
or any other person.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As of December 31, 2000 there were 982 shareholders of Bancshares' stock.
Bancshares common stock is not actively traded on any market. Per share prices
reflected in the following table are based on records of actual sales during
stated time periods. These records may not include all sales during these time
periods if sales were not reported to First Citizens for transfer.
Quarter Ended High Low
March 31, 2000 $24.00 $24.00
June 30, 2000 $24.00 $19.00
September 30, 2000 $19.00 $19.00
December 31, 2000 $19.00 $19.00
March 31, 1999 $30.00 $30.00
June 30, 1999 $30.00 $30.00
September 30, 1999 $30.00 $30.00
December 31, 1999 $30.00 $30.00
16
Dividend payouts per share restated to reflect a 4:1 stock split in June 1998
were 1.00 dollar in 2000, .90 cents in 1999 and .75 cents in 1998.
Dividends - 2000
Dividend Quarter
Per Share Declared
.2250 1st
.2250 2nd
.2250 3rd
.3250 4th
-----
Total $ 1.00
*Special dividend paid in fourth quarter 2000, 1999 and 1998.
Future dividends will depend on Bancshares' earnings and financial condition and
other factors which the Board of Directors of Bancshares considers relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information for Bancshares effective December 31
for the years indicated.
(in thousands)
(except per share data)
2000 1999 1998 1997 1996
Net Interest &
Fee Income $ 18,594 $ 19,305 $ 17,964 $ 16,021 $ 14,956
Gross Interest
Income $ 38,137 $ 36,085 $ 35,252 $ 30,698 $ 28,862
Income From
Continuing
Operations $ 4,612 $ 5,799 $ 4,474 $ 4,730 $ 4,254
Long Term
Obligations(1) $ 43,429 $ 11,264 $ 25,486 $ 12,146 $ 6,997
Income Per Share
from Continuing
Operation(2) $ 1.24 $ 1.58 $ 1.25 $ 1.38 $ 1.22
Net Income per
Common Share (2)
$ 1.24 $ 1.58 $ 1.25 $ 1.38 $ 1.22
Cash Dividends
Declared
per Common
Share(2) $ 1.00 $ .90 $ .75 $ .50 $ .40
Total Assets at
Year End $500,954 $472,670 $472,153 $384,183 $357,269
Allowance for
Loan Losses
as a % Loans 1.10% 1.14% 1.25% 1.21% 1.07%
Allowance for
Loan Losses as
a % of Non-
Performing Loans 125.01% 445.26% 509.62% 461.76% 176.08%
Loans 90 Days
Past Due as a
% of Loans .47% .10% .14% .00% .09%
17
(1)Long Term Obligations consist of FHLB Borrowings, an ESOP Obligation, and
Finance Company Debts.
(2)Restated to reflect 4 for 1 Stock Split on June 15, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Citizens Bancshares, Inc (Bancshares) is a financial holding company
headquartered in Dyersburg, Tennessee and doing business primarily in Dyer,
Lauderdale and Obion Counties. The primary asset of Bancshares is First Citizens
National Bank, but also includes a full service brokerage subsidiary (First
Citizens Financial Plus), 50% ownership in a full service insurance agency
(White & Associates/First Citizens Insurance), and a consumer finance affiliate
(Delta Finance). The banking structure includes a Trust division, a Mortgage
Loan department and an Electronic Banking/Call Center.
EARNINGS ANALYSIS:
First quarter of year 2000 produced positive results and held out the promise of
another record breaking year for earnings. Net income was up 8.6% over the prior
year, supported by growth in net interest income and a significant contribution
from our brokerage subsidiary, First Citizens Financial Plus. Increased pressure
on net interest margins in the second quarter brought about by rising interest
rates suppressed earnings and produced results that were below the same period
in 1999. Third and fourth quarter results were even more stressed as margins
became tighter and earnings were further reduced by payouts to two individuals
choosing to exercise contract options available as a result of merger activity
in Obion County in 1998. Total payout exceeded $800,000 and represented the
extent of First Citizens' contract liability to employees of the merged bank.
Fourth quarter earnings were further impacted by an additional provision to loan
loss reserve totaling $544 thousand, which represents deterioration in three
credits and does not reflect a trend within the loan portfolio.
Interest income for the year increased 5.68%, a gain offset by a 6.46% increase
in interest expense. Six rate increases by the Federal Reserve in a one-year
period played havoc with net interest margins and forced management to rethink
our funding strategy. As a result, the decision was made to outsource the
investment portfolio and in so doing, avail First Citizens of expertise
unavailable in-house. We are now operating under a new Board approved strategy
recommended by the portfolio manager and are moving toward improved net interest
margins with less volatility when faced with market rates changes.
Other income improved 7.4% while other expense was up only 2%, exclusive of
contract payouts totaling $809,000. This was accomplished by a continued focus
on the importance of fee income and a commitment to managing controllable
expense. Future acquisition of companies in which employees hold contracts
granting golden parachutes will be handled in a manner that addresses the
financial impact at the time of transaction, avoiding the situation that
occurred in Year 2000.
ASSETS/LOANS/DEPOSITS:
The company hit a milestone in Year 2000 when assets exceeded $500 million. In
so doing, we have aligned ourselves with a new peer group in terms of
comparison, and will now be governed by rules that apply to banks over this
asset level. The major impact will be dealt the audit function, with the Board
Audit Committee and the company's External Auditor being subjected to tighter
rules in terms of independence and qualification. We see no problem in complying
with the more rigid criteria and have taken steps necessary to satisfy SEC
requirements, even though Bancshares has a grace period which delays mandatory
compliance until 2003.
18
Loan growth of 4.8% was centered primarily in the category of commercial and
residential real estate. Deterioration in the economy in general has resulted in
a tightening of loan underwriting standards and sacrificed a higher level of
growth to ensure continued quality in the portfolio. Growth in the agricultural
segment of the portfolio has been negligible as farmers experienced a third year
of less than satisfactory results with no real promise of improved
profitability, other than federal disaster payments. Economists from the Food
and Agricultural Policy Research Institute and the Agriculture and Food Policy
Center have projected that U.S. net farm income could drop more than $9 billion
in the next two years as a result of lower government payments and increased
production costs. These statistics are based on normal weather conditions, a
continuation of present farm programs and continuation of government loan rates
at their maximum levels. In view of such dire predictions and a continuation of
year after year operating results that produce inadequate profit levels, banks
will become less inclined to provide financing needed to support the industry.
First Citizens remains the largest agricultural lender in our area. Our
commitment to the industry has been evident since the bank was chartered in
l889, but we are obligated to Shareholders to recognize risk inherent in any
industry segment and make lending decisions based on sound underwriting
standards, including the ability to repay.
In order to predict probable losses on loans, allowance determination policy
shall reflect historical losses on pools of loans and the relationship to actual
previously predicted losses. If significant differences are evident, then
justification shall be addressed. If probable losses are detected then
appropriate assets shall be identified as impaired, they will be analyzed, and
specific allocations funded in order to avoid extraordinary charges to reserve.
It shall be incumbent upon registrant to ensure that assets are graded for
quality in a timely manner and appropriate reserves maintained, based on
internal analysis. Local trends in sales tax receipts, unemployment, and
economic development shall be assessed quarterly and adjustments made to
allowance based on upward or downward trends to these elements. National
economic conditions shall be monitored but direct a much lesser impact on
allowance determination.
Deposit market share of First Citizens in Dyer County increased from 53.75% at
June 30, 1999 to 57.67% as of June 30, 2000. This was accomplished with deposit
growth of less than 1.5%, emphasizing the challenge to banks of funding any
measurable volume of loan growth with growth in deposits. Liquidity continues to
be one of the most serious issues facing banks of all sizes. First Citizens has
turned primarily to the Federal Home Loan Bank to address funding needs, with
alternatives being lines of credit with correspondent banks and the Bankers Bank
as well as brokered deposits. While we would prefer to fund loans with deposits,
we acknowledge that this is no longer an option and recognize that future
strategy must insure a dependable source of liquidity that will support asset
growth.
SHAREHOLDER RETURN & EQUITY CAPITAL:
The highest classification in terms of capital levels that can be assigned by
banking regulators is "well capitalized". In order to attain this
classification, banks must maintain a 10% risk-based capital ratio. First
Citizens' risk-based capital ratio as of December 31, 2000 was 13.78%, almost
$13 million in excess of that necessary to be classified at the highest level.
While earnings were down for the year, the Board made a decision to increase
dividends by 10.5% based on the belief that the earnings stall is temporary and
that the level of excess capital justifies an increase in payout to
shareholders. Stockholder equity has grown consistently, supported over the
years by strong earnings and quality assets. Equity capital at 12/31/00 was $47
million compared to $44 million at year-end 1999, up in excess of 7%. Since
dividends to shareholders in year 2000 were 81% of earnings, most of the
increase can be attributed to an improvement in the accumulated adjustment of
unrealized loss on securities available-for-sale from ($2,036,000) at year-end
1999 to ($371) as of 12/31/00.
19
OTHER ISSUES:
Bankruptcy continues to be an issue of major concern to banks nationwide. It has
been determined that the U.S. economy loses $40 billion annually because of
bankruptcy filings. These losses are passed along to all consumers, including
those who responsibly pay their debts, through higher interest rates, increased
prices for goods and services, and reduced credit access. In addition, the
courts in West Tennessee have a reputation for being extremely lenient with
debtors, placing lending institutions and others who deal in credit at a higher
risk of loss than others nationwide. It is important to ensure that bankruptcy
protection is available to those who truly need it, emphasizing the need for
reform that focuses on a "needs-based" approach and eliminates the fraud
inherent in the current system.
Changes in Financial Accounting Standards
In June, 1998, the Financial Accounting Standards Board (FASB) issued its
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
which established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. As issued FASB Statement No. 133 was to become effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. In 1999,
the FASB issued Statement No. 137 which delayed the effective date of Statement
No. 133 for one year until fiscal years beginning after June 15, 2000. In June
2000, FASB issued Statement No. 138 Accounting for Certain Derivative
Investments and Certain Hedging Activities which further amended Statement No.
133 without changing the effective date. As issued, these Statements require
that derivative instruments be reported either as assets or liabilities in the
balance sheet and that they be reflected at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
instrument and the resulting designation. First Citizens Bancshares, Inc.
utilized the derivative as a cash flow hedge, hedging the "benchmark interest
rate."
Also in 2000, FASB issued Statement No. 139 which rescinded certain earlier FASB
statements and had no impact on the financial statements of the Company.
In September 2000, FASB Statement No. 140 Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities was issued. Statement
No. 140 replaces Statement No. 125, which had the same name. The pronouncement
revises standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures. The Statement
is effective for relevant transactions occurring after March 31, 2001.
NON-INTEREST INCOME
The following table reflects restated non-interest income for the years ending
December 31, 2000, 1999, and 1998:
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
2000 Amount Percentage 1999 Amount Percentage 1998
Service Charges on
Deposit Accounts $2,711 $ 303 12.58% $2,408 $ 331 15.93% $2,077
Other Service Charges,
Charges, Commissions
& Fees $1,881 $ 224 13.51% $1,657 $ 544 48.87% $1,113
Other Income $1,480 $ (126) (7.84%) $1,606 $ 207 14.79% $1,399
TOTAL NON-INTEREST
INCOME $6,072 $ 401 7.07% $5,671 $1,082 23.57% $4,589
20
Growth in non-interest income is key to sustaining increases in overall net
income as net interest margins continue to be squeezed. The components of First
Citizens non-interest income include service charges on deposit accounts, other
fees and service charges, fiduciary income, ATM/POS interchange fees, and other
income from subsidiaries (Financial Plus, White and Associates/First Citizens
Insurance, Delta Finance). Total non-interest income in 2000 increased 7% to
$6,072,000 compared to a 23.6% increase in 1999. Service charges on deposit
accounts increased 12.6% from 1999 to 2000 primarily due to increased overdraft
fee income. A strong focus on fee income and diversification of the income
stream is reflected in the increased percentages in 2000 of 13.5% in other
service charges and fees. Improved earnings are attributed to continued growth
in income received from Financial Plus, Inc. and First Citizens Insurance. A
large portion of Trust Department fee income is calculated as a percent of
portfolio market value. Volatility in financial markets has resulted in a
decrease in market value of many investment portfolios, thus negatively
impacting derived income in this area. In addition, total volume of assets
managed has decreased resulting in lower fee income.
NON-INTEREST EXPENSE
December 31
Change from prior year
(in thousands)
Increase Increase
Total (Decrease) Total (Decrease) Total
2000 Amount Percentage 1999 Amount Percentage 1998
Salaries & Employee
Benefits $ 8,751 $ 79 .91% $ 8,672 $ 384 4.63% $ 8,288
Occupancy Expense $ 2,938 $ 212 7.77% $ 2,726 $ 311 12.87% $ 2,415
Other Operating
Expense $ 4,957 $ 946 23.58% $ 4,011 $ 71 1.80% $ 3,940
TOTAL NON-INTEREST
EXPENSE $16,646 $1,237 8.02% $15,409 $ 766 5.23% $14,643
Total non-interest expense increased approximately 8% in 2000 primarily due to
an increase of $946,000 in other operating expense. This increase is a result of
the Obion County payouts and the decrease in Trust Department income. The 5%
increase noted when comparing 1999 to 1998 reflects growth in salaries and
benefits from the addition of employees at First Volunteer Bank, Bank of Troy,
Mortgage Lending, Financial Plus, Delta Finance and in support positions at
First Citizens National Bank. The Bank of Troy, Troy, TN and First Volunteer
Bank, Union City, TN were converted to the books of First Citizens National Bank
in 1999 as branches of the bank. These conversions set the stage for a reduction
in number of employees as well as providing for economies of scale in
information systems. Non-recurring expense incurred at Bank of Troy in 1998
exceeded $1.3 million and included benefit plans, additional loan loss reserves
and buy out of an employment contract of the Bank's former CEO. Full-time
equivalent employees were 209 at December 31, 2000 compared to 203 at December
31, 1999. Assets per employee at December 31, 2000 was $2.4 million, up slightly
when compared to $2.3 at December 31, 1999 and 1998.
Other operating expense increased 23.6% from 1999 to 2000. This increase is a
result of payouts to two individuals choosing to exercise contract options
available as a result of merger activity in Obion County in 1998. Total payout
exceeded $800,000 and represented the extent of First Citizens' contract
liability to employees of the merged bank. Other components negatively impacting
this are were decreased Trust Department fee income and securities gains/losses.
Other operating expense reflects only a 2% increase exclusive of contract
payouts. Future acquisition of companies in which employees hold contracts
granting golden parachutes will be handled in a manner that addresses the
financial impact at the time of transaction, avoiding the situation that
occurred in Year 2000.
21
Data processing expense increased in 1998 and 1999 as a result of software
enhancements, the installations of a Wide Area Network, cost of addressing year
2000 issues, associated merger costs, and the introduction of Online Banking to
our customers. The increase does not reflect the time and attention of key staff
members to ensure that systems were compliant and would deal efficiently with
the new millennium date change. Increase in occupancy expense from 1998 to 1999
was greatly influenced by the construction of the new branch office in Ripley,
early construction stages of the new Green Village Office, and increased
depreciation expense.
Efficiencies implemented over the past five years have reduced and/or controlled
non-interest expense in an acceptable manner. Going forward, management will
focus on increasing the potential to generate non-interest income through
investment in non-banking subsidiaries such as insurance agencies, consumer
finance companies, and our brokerage business. In addition, we will concentrate
on internal income growth in the bank's mortgage lending and trust services
departments.
Assets Per Employee Asset Per Employee
Peer Groups
December 31 (in thousands)
2000 $2,397 $2,860
1999 $2,328 $2,540
*1998 $2,354 $2,400
1997 $2,151 $2,400
1996 $2,159 $2,300
*1998 includes Bank of Troy and Delta Finance II. Assets per
employee increased due to Troy's positive position.
COMPOSITION OF DEPOSITS
The average daily amounts of deposits and rates paid on such deposits are
summarized for the periods indicated:
December 31
(in thousands)
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Non-Interest
Bearing Demand
Deposits $ 39,549 0.00% $ 39,805 0.00% $ 37,742 0.00%
Savings Deposits $114,316 3.04% $111,278 2.99% $106,259 3.20%
Time Deposits $210,177 5.79% $208,908 4.91% $202,370 5.62%
TOTAL DEPOSITS $364,042 4.30% $359,991 3.77% $346,371 4.27%
Deposits increased 1.13% in 2000 in comparison to 3.9% in 1999. Total deposits
have been restated as required by FASB Accounting Standards for
pooling-of-interests. Actual deposit growth in 1999, including deposits acquired
from mergers and acquisitions, was 34.85 percent. The company's marketplace is
described as highly competitive, with a fairly sophisticated customer base.
Competition is aggressive for both loans and deposits. Retention of savings and
time deposits continues to be a challenge with increased competition by
brokerage firms, insurance companies and other financial service providers.
Competitor marketing programs are aggressive in seeking new deposit dollars with
advertising programs that offer above maket rates on certificates of deposits in
some market areas. According to a recent survey First Citizens maintains
approximately 58% of Dyer County market share; 15% of Obion County market share
and 5% of Lauderdale County market share. In the Dyer County market the bank
competes with Union Planters (7.5%), First Tennessee Bank (16%), Security Bank
(17%), and City State Bank (2%). The bank's largest competitor in Lauderdale
County is Bank of Ripley (36.5%). Competition in Obion County ranks First State
Bank
22
43.1% market share, Commercial Bank and Trust 17.2%, Union Planters 9.3%, and
Reelfoot Bank 13.3%.
Deposit growth remained relatively flat in 2000. The average rate paid on total
deposits continued to decline from 4.27% in 1998 to 3.77% in 1999. However, an
increase in rates by the Federal Reserve prompted a reversal of this trend
during the fourth quarter of 1999. As a result, the average rate paid on total
deposits increased to 4.30% in 2000. The new "Wall Street Checking" account
introduced during third quarter is designed to support efforts to grow the
deposit base. This account combines benefits of unlimited checking and earning
rates competitive with those paid by brokers. The management of liquidity needs
has evolved as a major challenge to community banks. Making the right investment
choices, identifying funding sources that impose the least risk to First
Citizens asset/liability management process and finding creative ways to induce
deposit growth will ensure our continued success as an independent community
bank.
Management is continuously monitoring and enhancing the bank's product line in
order to retain existing customers and to attract new customer relationships.
First Citizens introduced Internet based banking to the market place September
1, 1999. The service allows customers to access account information, statement
activity, apply for a deposit or loan and pay bills by signing on to
firstcitizens-bank.com. The cost of Internet banking is free to customers, while
bill pay is offered at a competitive price. The bank's Call Center now provides
more efficient customer support from account inquiry to electronic banking
products and services. A focus on developing the Small Business segment of our
customer base has been significantly enhanced by the introduction of a trio of
Internet products that promote a "Surf Locally, Shop Locally" theme. A web page
development service, the ability to be a part of a virtual Internet Mall and the
introduction of First Citizens as an Internet Service Provider (ISP) will place
our organization well above the competition in this business segment.
SHORT TERM BORROWINGS
12/31/00 12/31/99
Amount outstanding-end of Period $34,174 $46,090
Weighted Average Rate of Outstanding 5.55% 4.56%
Maximum Amount of Borrowings at
Month End 54,600 47,470
Average Amounts Outstanding for
Period 49,436 32,759
Weighted Average Rate of Average
Amounts 5.97% 4.46%
Long term debt for 2000 is comprised of Federal Home Loan Bank borrowings
totaling $56,929,000 and Delta Finance Company obligation of $1,000,000. Other
long term obligations consist of a note payable of Employee Stock Ownership Plan
to Suntrust Bank, balance at 12/31/00 of $920,000. 1999 long term debt included
Federal Home Loan Bank borrowings totaling $12,528,000, Delta Finance Company
debt of $1,000,000, and the Employee Stock Ownership Plan obligation of
$1,117,000.
Average Average Average Repricing
Volume Rate Maturity Frequency
FHLB Borrowings 56,929 5.90% 3 years Fixed
Finance Company Debt 1,000 6.00% 5 years Fixed
ESOP Obligation 920 7.25% 5 years Monthly
The following table sets forth the maturity distribution of Certificates
of Deposit and other time deposits of $100,000 or more outstanding on the books
of First Citizens on December 31, 2000. The overall total increased in excess of
$2.2 million when compared to the prior year.
23
MATURITY DISTRIBUTION OF TIME DEPOSITS IN AMOUNTS OF $100,000 AND OVER
December 31
(in thousands)
2000 1999
Amount Percent Amount Percent
Maturing in:
3 months or less $45,450 62.19% $44,946 63.42%
Over 3 through 12 months $22,703 31.05% $22,980 32.43%
Over 12 months $ 4,948 6.76% $ 2,936 4.15%
TOTAL $73,101 100.00% $70,862 100.00%
The following table sets forth an analysis of sources and uses of funds for the
years under comparison.
SOURCES AND USES OF FUNDS
(in thousands)
2000 1999 1998
FUNDING USES Average Increase Average Increase Average
Balance (Decrease) Balance (Decrease) Balance
Amount % Amount % Amount
INTEREST-EARNING
ASSETS:
Loans (Net of
Unearned Discounts
& Reserve) $330,468 $ 7,421 2.29% $323,047 $33,631 11.62% $289,416
Taxable Investment
Securities $ 87,108 $(2,260) (2.52%)$ 89,368 $ 5,449 6.49% $ 83,919
Non-Taxable
Investment
Securities $ 13,078 $ 6 .04% $ 13,072 ($ 1,127) (7.93%)$ 14,199
Federal Funds
Sold $ 1,201 $(1,489)(55.35%)$ 2,690 ($ 6,060) 69.25% $ 8,750
Interest Earning
Deposits In
Banks $ 1,549 $ 518 50.24% $ 1,031 $ 51 5.20% $ 980
TOTAL INTEREST-
EARNING ASSETS $433,404 $ 4,196 .97% $429,208 $31,944 8.04% $397,264
Other Uses $ 51,296 $ 7,620 17.44% $ 43,376 $ 5,218 13.67% $ 38,158
TOTAL FUNDING
USES $484,700 $12,116 2.56% $472,584 $37,162 8.53% $435,422
INTEREST-BEARING
LIABILITIES:
Savings
Deposits $114,316 $ 3,038 2.73% $111,278 $ 5,019 4.72% $106,259
Time Deposits $210,177 $ 1,269 .60% $208,908 $ 6,538 3.23% $202,370
Federal Funds
Purchased and
Other Interest
Bearing Liabilities $ 71,822 $ 6,904 10.63% $ 64,918 $18,418 39.60% $ 46,500
TOTAL INTEREST-
BEARING LIABILITIES $396,315 $11,211 2.91% $385,104 $29,975 8.44% $355,129
Demand Deposits $ 39,549 $ (256) (.64%)$ 39,805 $ 2,063 5.46% $ 37,742
Other Sources $48,836 $ 1,161 2.43% $ 47,675 $ 5,124 12.04% $ 42,551
TOTAL FUNDING
SOURCES: $484,700 $12,116 2.56% $472,584 $37,162 8.53% $435,422
24
SUMMARY - AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(FIRST CITIZENS NATIONAL BANK)
Monthly Average Balances and Interest Rates
(in thousands)
2000 1999 1998
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
INTEREST EARNING
ASSETS:
Loans (1)(2)
(3) $330,468 $31,631 9.57% $323,047 $29,382 9.10% $289,416 $28,502 9.84%
Investment
Securities:
Taxable $ 87,108 $ 5,732 6.58% $ 89,368 $ 5,903 6.61% $ 83,919 $ 5,405 6.44%
Tax Exempt (4) $ 13,078 $ 959 7.33% $ 13,072 $ 938 7.18% $ 14,199 $ 1,085 7.64%
Interest Earning
Deposits $ 1,549 $ 86 5.55% $ 1,031 $ 42 4.07% $ 980 $ 55 5.61%
Federal Funds
Sold $ 1,201 $ 55 4.57% $ 2,690 $ 148 5.50% $ 8,751 $ 639 7.30%
Lease Financing $ 0 $ 0 0% $ 0 $ 0 0% $ 0 $ 0 0%
Total Interest
Earning Assets $433,404 $38,463 8.87% $429,208 $36,413 8.48% $397,264 $35,686 8.98%
NON-INTEREST
EARNING ASSETS:
Cash and Due From
Banks $ 12,736 $ 0 0% $ 13,531 $ 0 0% $ 12,005 $ 0 0%
Bank Premises and
Equipment $ 14,101 $ 0 0% $ 13,035 $ 0 0% $ 10,180 $ 0 0%
Other Assets $ 24,459 $ 0 0% $ 16,810 $ 0 0% $ 15,973 $ 0 0%
Total Assets $484,700 $ 0 0% $472,584 $ 0 0% $435,422 $ 0 0%
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
INTEREST BEARING
LIABILITIES:
Savings Deposits $114,316 $ 3,481 3.04% $111,278 $ 3,324 2.99% $106,259 $ 3,400 3.20%
(5)
Time Deposits $210,177 $12,183 5.79% $208,908 $10,262 4.91% $202,370 $11,391 5.62%
Federal Funds
Purchased and
Other Interest
Bearing
Liabilities $ 71,822 $ 3,879 5.40% $ 64,918 $ 3,194 4.92% $ 46,500 $ 2,497 5.36%
Total Interest
Bearing
Liabilities $396,315 $19,543 4.93% $385,104 $16,780 4.36% $355,129 $17,288 4.86%
NON-INTEREST
BEARING
LIABILITIES:
Demand Deposits $ 39,549 $ 0 0% $ 39,805 $ 0 0% $ 37,742 $ 0 0%
Other
Liabilities $ 3,451 $ 0 0% $ 3,993 $ 0 0% $ 2,688 $ 0 0%
Total
Liabilities $439,315 $ 0 0% $427,762 $ 0 0% $395,559 $ 0 0%
SHAREHOLDERS'
EQUITY $ 45,385 $ 0 0% $ 43,682 $ 0 0% $ 39,863 $ 0 0%
25
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $484,700 $ 0 0% $472,584 $ 0 0% $435,422 $ 0 0%
NET INTEREST
INCOME $ 0 $18,920 0% $ 0 $19,633 0% $ 0 $18,398 0%
NET YIELD ON
AVERAGE EARNING
ASSETS $ 0 $ 0 4.36% $ 0 $ 0 4.57% $ 0 $ 0 4.63%
(1) Loan totals are shown net of interest collected, not earned
and loan loss reserves.
(2) Fee Income is included in interest income and the computations
of the yield on loans.
(3) Includes loans on nonaccrual status.
(4) Interest and rates on securities which are non-taxable for Federal
Income Tax purposes are presented on a taxable equivalent basis.
(5) Includes interest bearing deposit accounts excluding time deposits.
VOLUME/RATE ANALYSIS
(First Citizens 2000 Compared to 1999 1999 Compared to 1998
National Bank) Due to Changes in: Due to Changes in:
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Earned On: (in thousands)
Loans $ 675 $1,574 $2,249 $3,309 $(2,429) $ 880
Taxable Investments (149) (22) (171) 351 147 498
Tax Exempt Investment
Securities 1 20 21 (86) (61) (147)
Interest Bearing
Deposits with Other
Banks 21 23 44 3 (16) (13)
Federal Funds Sold and
Securities purchased
under agreements to
resell (82) (11) (93) (442) (49) (491)
Lease Financing 0 0 0 0 0 0
TOTAL INTEREST EARNING
ASSETS $ 466 $1,584 $2,050 $3,135 $(2,408) $ 727
Interest Paid On:
Savings Deposits 91 66 157 161 (237) (76)
Time Deposits 623 1,298 1,921 367 (1,496) (1,129)
Federal Funds Purchased
and Securities Sold
Under Agreement to
Repurchase 340 345 684 987 (290) 697
TOTAL INTEREST BEARING
LIABILITIES $1,054 $1,709 $2,763 $1,515 $(2,023) $ (508)
NET INTEREST EARNINGS $ (588) $ (125) $ (713) $1,620 $ (385) $1,235
26
A summary of average interest earning assets and interest bearing liabilities is
set forth in the preceding table together with average yields on the earning
assets and average cost on the interest bearing liabilities. Total interest
earning assets increased .98% and 8.4% when comparing 2000 to 1999 and 1998.
Total interest bearing liabilities increased 2.91% and 8.44% when comparing
2000, 1999, and 1998 respectively. Total interest earning assets averaged
$433,404,000 at an average rate of 8.87% while total interest bearing
liabilities averaged $396,315,000 at an average rate of 4.93%. Net yield on
average earning assets (annualized) was 4.36%, 4.57%, and 4.63% for the years
2000, 1999, and 1998. Six rate increases by the Federal Reserve in a one-year
period played havoc with net interest margins and forced management to rethink
our funding strategy. As a result, the decision was made to outsource the
investment portfolio and in so doing, avail First Citizens of expertise
unavailable in-house. We are now operating under a new Board approved strategy
recommended by the portfolio manager and are moving toward improved net interest
margins with less volatility when faced with market rate changes. Other measures
taken include utilization of long term borrowings in brokered CD's and Federal
Home Loan Bank funds.
LOAN PORTFOLIO ANALYSIS
COMPOSITION OF LOANS
December 31
(in thousands)
2000 1999 1998 1997 1996
Real Estate Loans:
Construction $ 34,195 $ 34,431 $ 28,048 $ 23,378 $ 21,564
Mortgage $197,040 $189,787 $159,637 $151,333 $142,079
Commercial, Financial
and Agricultural Loans $ 63,703 $ 60,446 $ 87,927 $ 52,212 $ 46,581
Installment Loans to
Individuals $ 42,754 $ 37,595 $ 29,197 $ 26,904 $ 23,743
Other Loans $ 3,267 $ 3,118 $ 2,522 $ 2,512 $ 2,479
TOTAL LOANS $340,959 $325,377 $307,331 $256,339 $236,446
CHANGES IN LOAN CATEGORIES
December 31, 2000 as compared to December 31, 1999
(in thousands)
Amount of Increase % of Increase
Loan Category (Decrease) (Decrease)
Real Estate $ 7,017 3.12%
Commercial, Financial
and Agricultural $ 3,257 5.38%
Installment Loans to
Individuals $ 5,159 13.72%
Other Loans $ 149 4.77%
TOTAL LOANS $15,582 4.78%
27
Outstanding loans at year-end 2000 increased 4.79% when compared to year-end
1999. The 1998 total loan balance has been restated to include loans acquired
from First Volunteer totaling $28.7 million. Loan growth consisted of increased
volume in all loan categories, with the largest percent growth of 13.72% or $5
million reflected in Installment Loans and the largest volume growth of $7
million reflected in Real Estate Loans. Commercial, Financial and Agricultural
Loans reflected a 31.25% decrease from 1998 to 1999 primarily due to paydowns in
commercial loans. The expansion into Obion County affords new lending
opportunities, which would support future growth projections, while at the same
time building on existing customer relationships. Net loan growth for the five
years ending December, 2000 was approximately 44 percent. Competition for
quality loans continues to place pressure on the yield and terms customers are
willing to accept. Loan Administration has taken a conservative position in
dealing with situations which deviate from established underwriting procedures,
while at the same time recognizing the need to maintain loan growth.
An increase of 22% for the year ending December 31, 1998 reflects loans acquired
as a result of the Troy acquisition. Loan growth of 4.8% was centered primarily
in the category of commercial and residential real estate. Deterioration in the
economy in general has resulted in a tightening of loan underwriting standards
and sacrificed a higher level of growth to ensure continued quality in the
portfolio. Growth in the agricultural segment of the portfolio has been
negligible as farmers experienced a third year of less than satisfactory results
with no real promise of improved profitability, other than federal disaster
payments. Economists from the Food and Agricultural Policy Research Institute
and the Agriculture and Food Policy Center have projected that U.S. net farm
income could drop more than $9 billion in the next two years as a result of
lower government payments and increased production costs. These statistics are
based on normal weather conditions, a continuation of present farm programs and
continuation of government loan rates at their maximum levels. In view of such
dire predictions and a continuation of year after year operating results that
produce inadequate profit levels, banks will become less inclined to provide
financing needed to support the industry. First Citizens remains the largest
agricultural lender in our area. Our commitment to the industry has been evident
since the bank was chartered in l889, but we are obligated to Shareholders to
recognize risk inherent in any industry segment and make lending decisions based
on sound underwriting standards, including the ability to repay.
Mortgage loans have experienced continued growth of more than 38% since 1996,
with only a 3.12% increase from 1999 to 2000 primarily due to the six interest
rate increases. The upward trend is attributed to substantial growth in Dyer
County population as well, the number of households recorded in Dyer county in
the past decade and strong economic conditions. Market information and
employment rates are published in this report in the section titled Banking
Business.
The First Citizens loan portfolio is made up of quality credits, and is well
diversified with a concentration of credit in real estate related loans. Real
estate related loans total over $231 million. Problem loans increased $1.6
million when compared to December 31, 1999. Problem loans at December 31, 2000
were $8.7 million or 2.5% of total loans. The provision for loan losses
increased in proportion to loan growth and added risk as dictated by loan
policy.
The book value of repossessed real property held by First Citizens was $318,000
at December 31, 2000 compared to $390,458 at December 31, 1999. Accounting for
adjustments to the value of Other Real Estate when recorded subsequent to
foreclosure is accomplished on the basis of independent appraisal. The asset is
recorded at the lesser of its appraised value or the loan balance.
28
Loan Administration sets policy guidelines approved by the Board of Directors
regarding portfolio diversification and underwriting standards. Loan policy
also includes board approved guidelines for collateralization, loans in excess
of loan to value limits, maximum loan amount, maximum maturity and
amortization period for each loan type. Policy guidelines for loan to value
ratio and maturities related to various collateral as follows:
Collateral Max. Amortization Max. LTV
---------- ----------------- --------
Real Estate Various (see discussion) Various (see discussion)
Equipment 5 Years 75%
Inventory 5 Years 50%
A/R 5 Years 75%
Livestock 5 Years 80%
Crops 1 Year 50%
*Securities 10 Years 75% (Listed)
50% (Unlisted)
*Maximum LTV on margin stocks (stocks not listed on a national exchange) when
proceeds are used to purchase or carry same, shall be 50%.
Diversification of the banks' real estate portfolio is a necessary and desirable
goal of the bank's real estate loan policy. In order to achieve and maintain a
prudent degree of diversity, given the composition of the bank's market area and
the general economic state of the market area, the bank will strive to maintain
a real estate loan portfolio diversification based upon the following:
. Agricultural loans totaling in the aggregate no more than 20% of the Bank's
total loans.
. Land acquisition and development loans totaling in the aggregate no more than
10% of the Bank's total loans.
. Commercial construction loans totaling in the aggregate no more than 10% of
the Bank's total loans.
. Residential construction loans totaling in the aggregate no more than 10% of
the Bank's total loans.
. Residential mortgage loans totaling in the aggregate no more than 40% of the
Bank's total loans.
. Commercial loans totaling in the aggregate no more than 30% of the Bank's
total loans.
It is the policy of FCNB that no real estate loan will be made (except in
accordance with the provisions for certain loans in excess of supervisory limits
provided for hereinafter) that exceed the loan-to-value percentage limitations
("LTV limits") designated by category as follows:
Loan Category LTV Limit
Raw Land 65%
Land Development or Farmland 75%
Construction:
Commercial, multi-family, and
other non-residential 80%
1-to-4 family residential 80%
Improved Property 80%
Owner-occupied 1-to-4 family
and home equity 80%
29
Multi-family construction loans include loans secured by cooperatives and
condominiums. Owner-occupied 1-to-4 family and home equity loans which equal or
exceed 90% LTV at origination must have either private mortgage insurance or
other readily marketable collateral pledged in support of the credit.
On occasion, the Loan Committee may entertain and approve a request to lend sums
in excess of the LTV limits as established by policy, provided that:
. The request is fully documented to support the fact that other credit
factors justify the approval of that particular loan as an exception to
the LTV limit;
. The loan, if approved, is designated in the Bank's records and reported
as an aggregate number with all other such loans approved by the full
Board of Directors on at least a quarterly basis;
. The aggregate total of all loans so approved, including the extension of
credit then under consideration, shall not exceed 50% of the Bank's
total capital; and
. Provided further that the aggregate portion of these loans in excess of
the LTV limits that are classified as commercial, agricultural,
multi-family or non-1-to-4 family residential property shall not exceed
30% of the Bank's total capital.
Amortization Schedules: Every loan must have a documented repayment
arrangement. While reasonable flexibility is necessary to meet the credit needs
of the Bank's customers, in general all loans should be repaid within the
following time frames:
Loan Category Amortized Period
Raw Land 10 years
Construction:
Commercial, multi-family, and
other non-residential 20 years
1-to-4 family residential 20 years
Improved Property Farmland 20 years
Owner-occupied 1-to-4 family
and home equity 20 years
The average yield on loans of First Citizens National Bank for the years
indicated are as follows:
2000 - 9.57%
1999 - 9.10%
1998 - 9.72%
1997 - 9.70%
1996 - 9.71%
The aggregate amount of unused guarantees, commitments to extend credit and
standby letters of credit was $56,803,000 at December 31, 1999.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Due after
Due in one one year but Due after
year or less within five years five years
(in thousands)
Real Estate $48,140 $134,048 $49,047
Commercial, Financial
and Agricultural $29,278 $26,646 $ 7,779
All Other Loans $10,281 $34,218 $ 1,522
TOTALS $87,699 $194,912 $58,348
30
Loans with Maturities After One Year for which:
(in thousands)
Interest Rates are Fixed or Predetermined $219,203
Interest Rates are Floating or Adjustable $ 34,057
The degree of interest rate to which a bank is subjected can be controlled
through a well managed asset/liability management program. First Citizens
controls interest rate risk by matching assets and liabilities, (by employing
interest-sensitive funds in assets that are also interest sensitive). One tool
used to ensure market rate return is variable rate loans. Loans totaling
$121,756,000 or 35.71% of the total portfolio are subject to repricing within
one year or carry a variable rate of interest. Loan maturities in the one to
five year category increased to $194,912,000 at December 31, 2000 from
$169,881,000 at December 31, 1999.
NON-PERFORMING LOANS
Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties
(First Citizens National Bank)
December 31
(in thousands)
2000 1999 1998 1997 1996
Nonaccrual Loans $1,389 $ 500 $ 303 $ 440 $1,118
Restructured Loans 0 0 0 0 0
Foreclosed Property
Other Real Estate, 318 390 177 0 50
Other Repossessed
Assets 0 0 0 0 0
Loans and leases 90 days
Past due and still
accruing interest 1,621 335 425 164 177
Total Nonperforming
Assets $1,939 $1,225 $ 905 $ 604 $1,295
Nonperforming assets
as a percent of
loans and leases
plus foreclosed
property at end
of year .56% .37% .33% .27% .62%
Allowance as a percent of:
Nonperforming
assets 194.06% 303.51% 386.30% 461.76% 176.22%
Gross Loans 1.10% 1.14% 1.26% 1.22% 1.08%
Addition to Reserve as a
percent of Net
Charge-Offs 103.29% 59.30% 154.27% 364.07% 112.16%
Loans and leases 90 days
past due as a percent of
loans and leases at year
end .47% .10% .15% .08% .09%
Recoveries as a
percent of Gross
Charge-Offs 19.69% 27.92% 34.77% 41.11% 20.15%
31
Total Non Performing Assets were $1,939,000 as of December 31, 2000 compared to
$1,225,000 at year end in 1999. Non performing Assets as a percent of loans was
.56% compared to .37% in 1999 and .33% in 1998. The provision for loan loss
reserves was increased by 96% over the 1999 allocation. A major portion of the
increase can be attributed to three unrelated credits and does not reflect an
overall decline in credit quality within the portfolio. Allowance for Loan
Losses as a percent of Nonperforming assets and total loans were 194.06%,
303.51%, and 386.30% for each year ending December 31, 2000, 1999, and 1998.
Loan policy calls for an allowance balance of at least 1% of total loans.
Continued improvements reflected in the financial ratios are indicative of well
communicated loan policies and procedures. Categorization of a loan as
non-performing is not in itself a reliable indicator of potential loan loss. The
banks' policy states that the bank shall not accrue interest or discount on (1)
any asset which is maintained on a cash basis because of deterioration in the
financial position of the borrower, (2) any asset for which payment-in-full of
interest or principal is not expected, or (3) any asset upon which principal or
interest has been in default for a period of 90 days or more unless it is both
well secured and in the process of collection. For purposes of applying the 90
day due test for the non-accrual of interest discussed above, the date on which
an asset reaches non-accrual status is determined by its contractual term. A
debt is well secured if it is secured (1) by collateral in the form of liens or
pledges or real or personal property, including securities that have a
realizable value sufficient to discharge the debt (including accrued interest)
in full, considered to be proceeding in due course either through legal action,
including judgement enforcement procedures, or, in appropriate circumstances,
through collection efforts not involving legal action which are reasonably
expected to result in repayment of the debt or in its restoration to a current
status. Loans that represent a potential loss to First Citizens are adequately
reserved for in the provision for loan losses.
Interest income on loans is recorded on an accrual basis. The accrual of
interest is discontinued on all loans, except consumer loans, which become 90
days past due, unless the loan is well secured and in the process of collection.
Consumer loans which become past due 90 to 120 days are charged to the allowance
for loan losses. The gross interest income that would have been recorded for the
twelve months ending December 31, 2000 if all loans reported as non-accrual had
been current in accordance with their original terms and had been outstanding
throughout the period is $90,000. Interest income on loans reported as ninety
days past due and on interest accrual status was $94,000 for 2000. Loans on
which terms have been modified to provide for a reduction of either principal or
interest as a result of deterioration in the financial position of the borrower
are considered to be "Restructured Loans". First Citizens has no Restructured
Loans for the period being reported.
Certain loans contained on the bank's Internal Problem Loan List are not
included in the listing of non-accrual, past due or restructured loans.
Management is confident that, although certain of these loans may pose credit
problems, any potential for loss has been provided for by specific allocations
to the Loan Loss Reserve Account. Loan officers are required to develop a "Plan
of Action" for each problem loan within their portfolio. Adherence to each
established plan is monitored by Loan Administration and re-evaluated at regular
intervals for effectiveness.
LOAN LOSS EXPERIENCE & RESERVE FOR LOAN LOSSES (in thousands)
2000 1999 1998 1997 1996
Average Net Loans
Outstanding $330,468 $323,047 $259,416 $ 220,985 $203,663
Balance of Reserve
for Loan Losses
at Beginning of
Period $ 3,718 $ 3,496 $ 2,789 $ 2,282 $ 2,216
Loan Charge-Offs $ (1,701) $ (1,214) $ (952) $ (326) $ (680)
32
Recovery of Loans
Previously Charged
Off $ 335 $ 339 $ 331 $ 134 $ 137
Net Loans Charged
Off $ 1,366 $ (875) $ (621) $ (192) $ (543)
Additions to Reserve
Charged to Expense $ 1,411 $ 720 $ 958 $ 699 $ 609
Changes Incident
to Mergers $ 0 $ 377 $ 370 $ 0 $ 0
Balance at End of
Period $ 3,763 $ 3,718 $ 3,496 $ 2,789 $ 2,282
Ratio of Net Charge-
Offs to Average Net
Loans Outstanding .40% .28% .23% .09% .27%
The preceding table summarizes activity posted to the Loan Loss Reserve Account
for the past five years. The summary includes the average net loans outstanding;
changes in the reserve for loan losses arising from loans charged off and
recoveries on loans previously charged off; additions to the reserve which have
been charged to operating expenses; and the ratio of net loans charged off to
average loans outstanding. Changes to the Reserve Account for the year just
ended consisted of Loans charged off of $1,701,000 (2) Recovery of loans
previously charged off $335,000 and (3) Additions to reserves totaling
$1,411,000.
The provision for loan loss reserves was increased by 96% over the 1999
allocation. A major portion of the increase can be attributed to three unrelated
credits and does not reflect an overall decline in credit quality within the
portfolio. In view of a slowing economy and the failure of congress to address
inequities in Bankruptcy Laws, management and the Board will continue to monitor
the adequacy of the reserve and make adjustments when necessary.
An analysis of the allocation of the allowance for Loan Losses is made on a
fiscal quarter at the end of the month, (February, May, August, and November)
and reported to the board at its meeting immediately preceding quarter-end.
Requirements of FASB 114 & 118 have been incorporated into the policy for
Accounting by Creditor for Impairment of a loan. A loan is impaired when it is
probable that a creditor will be unable to collect all amounts due of principal
and interest according to the original contractional terms of the loan. First
Citizens adopted the following as a measure of impairment: (1) Impairment of a
loan at First Citizens shall exist when the present value of expected future
cash flows discounted at the loans effective interest rate impede full
collection of the contract; and (2) Fair Value of the collateral, if the loan is
collateral dependent, indicates unexpected collection of full contract value.
The Impairment decision will be reported to the Board of Directors and other
appropriate regulatory agencies as specified in FASB 114 and 118. The bank will
continue to follow regulatory guidelines for income recognition for purposes of
generally accepted accounting principles, as well as regulatory accounting
principles.
An annual review of the loan portfolio to identify the risks will cover a
minimum of 70% of the gross portfolio less installment loans. In addition, any
single note or series of notes directly or indirectly related to one borrower
which equals 25% of the bank's legal lending limit will be included in the
review automatically.
33
In order to predict probable losses on loans, allowance determination policy
shall reflect historical losses on pools of loans and the relationship to actual
previously predicted losses. If significant differences are evident, then
justification shall be addressed. If probable losses are detected then
appropriate assets shall be identified as impaired, they will be analyzed, and
specific allocations funded in order to avoid extraordinary charges to reserve.
It shall be incumbent upon loan administration to ensure that assets are graded
for quality in a timely manner and appropriate reserves maintained, based on
internal analysis. Local trends in sales tax receipts, unemployment, and
economic development shall be assessed quarterly and adjustments made to
allowance based on upward or downward trends to these elements. National
economic conditions shall be monitored but direct a much lesser impact on
allowance determination.
For analysis purposes, the loan portfolio is separated into four
classifications:
1. Pass - Loans that have been reviewed and graded high quality or no
major deficiencies.
2. Watch - Loans which, because of unusual circumstances, need to be
supervised with slightly more attention than is common.
3. Problem - Loans which require additional collection efforts to
liquidate both principal and interest.
4. Specific Allocation - Loans, in total or in part, in which a future
loss is possible.
Examples of factors taken into consideration during the review are: Industry or
geographic economic problems, sale of business, change of or disagreement among
management, unusual growth or expansion of the business, past due status of
either principal or interest for 90 days, placed on non-accrual or renegotiated
status, declining financial condition, adverse change in personal life, frequent
overdrafts, lack of cooperation by borrower, decline in marketability or market
value of collateral, insufficient cash flow, and inadequate collateral values.
Identification of impaired loans from non-performing assets as well as bankrupt
and doubtful loans is paramount to the reserve analysis. Special allocations
shall support loans found to be collateral or interest cash flow deficient. In
addition an allowance shall be determined for pools of loans including all other
criticized assets as well as small homogeneous loans managed by delinquency. In
no circumstance shall the reserve fall below 1% of total loans less government
guarantees. The following is a sample of information analyzed quarterly to
determine the allowance for loan losses.
LOAN LOSS ALLOWANCE ANALYSIS
AVERAGE PERCENT CURRENT RESERVE
LOSS 1 YR. BALANCE 1 YR. BALANCE REQUIRED
I. CREDIT $ GROSS $ % $ $
CARDS
II. INSTALL. $ NET $ % $ $
LOANS
III. IMPAIRED WITH ALLOCATIONS $ $
IMPAIRED WITHOUT ALLOCATIONS $ $
34
ALLOWANCE
IV. DOUBTFUL 50.00% $ $
SUBSTANDARD 10.00%
ACCOUNTS RECEIVABLE FACTORING 1.00%
WATCH 5.00%
OTHER LOANS NOT LISTED PREVIOUSLY .75%
LESS SBA/FMHA GUARANTEED PORTIONS
TOTAL LOANS $
V. LETTERS OF CREDIT .75% $ $
VI. OTHER REAL ESTATE OWNED $
RESERVE REQUIRED $
RESERVE BALANCE $
EXCESS (DEFICIT) $
RESERVE AS % OF TOTAL LOANS %
PEER GROUP %
LOSS EXPERIENCE III & IV
(AVERAGE LAST 3 YEARS) % OR $
Accounting for adjustments to the value of Other Real Estate when recorded
subsequent to foreclosure is accomplished on the basis of an independent
appraisal. The asset is recorded at the lesser of its appraised value or the
loan balance. Any reduction in value is charged to the allowance for possible
loan losses. All other real estate parcels are appraised annually and the
carrying value is adjusted to reflect the decline, if any, in its realizable
value. Such adjustments are charged directl